Finance Bill Sub-Committee
Thursday 29th October 2026
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09:47
09:47
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09:47
Lord Liddle
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Lord Liddle
Right. Okay. Thank you very much. Well, we're looking at the. The mandatory payrolling of benefits in kind. Now, the ability to do this. Online has been in existence since 2016. And I think it's a matter of interest as to why it hasn't really taken off, given that you can do it, and that most people continue to submit a paper P 11 . And I'm interested in your explanation for why why this thing hasn't gone online, given that in lots of other walks of life, people are very used to this. Now, what's your views about this? And is it in some way the government's fault that they haven't tried to sell this to the public in a simple way?
Who's going to start? Katie.
Who's going to start? Katie.
09:48
Speaker 1
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Speaker 1
Yes, I can go first. I think there's probably a lot of reasons which join together to mean that it hasn't been as popular. So businesses have established processes. They're used to working with the p11d process. And this works for them. And actually I think seeing this mandation as a simplification is probably not the way that a business would see it. It is a transformation project, and transformation projects use up a lot of resource investment time and require a lot of planning. And businesses have their own internal calendars, so they will have worked out what time is needed from their payroll team, from the HR team, from other businesses, from other business units that feed into this process.
And therefore, it probably wouldn't get a lot of buy in internally if it's going to take up so much time and they already see that they have a process that works for them. And I think there would be concerns about the limitations of the software. Does it do what it needs to do? Concerns about double taxation, reliance on third party data is probably another big one that still is a concern. Would they be able to get the information in the required format and in the time that they needed to do it in real time, and also lack of guidance?
Some of the benefits are very complicated. The legislation doesn't necessarily support it being in real time. So there's there's a lack of guidance around how they would actually have done that.
And therefore, it probably wouldn't get a lot of buy in internally if it's going to take up so much time and they already see that they have a process that works for them. And I think there would be concerns about the limitations of the software. Does it do what it needs to do? Concerns about double taxation, reliance on third party data is probably another big one that still is a concern. Would they be able to get the information in the required format and in the time that they needed to do it in real time, and also lack of guidance?
Some of the benefits are very complicated. The legislation doesn't necessarily support it being in real time. So there's there's a lack of guidance around how they would actually have done that.
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09:50
Speaker 3
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Speaker 3
I suppose I would add to that, that. For a lot of organizations, they know the p11d process. They're really comfortable with it. Any change or moving to an unknown is difficult and difficult to get people on board. I'd add on to that, that in my defence, I think there are some benefits to employers, but the benefits to employers I think are limited. The main beneficiary of mandatory payrolling is HMRC. And then secondary to that are employers employees. So the employers are kind of at the bottom of the benefits that are there to them. So it's difficult to sell benefits to them.
Also, just adding on, you know, a business, their day to day kind of activities, operating the business, anything that interrupts that is a challenge and moving everything to an end of year, having defined processes, having certainty at that end of year is often simpler for a lot of organisations. So there's kind of a reluctance to move across. But also at the moment, under the voluntary regime, you still have to do the annual process of the P11d for employer national insurance purposes. So I think a lot of organizations don't see the benefit of having a real time process and also an end of year process.
So some of the benefits are limited there.
Also, just adding on, you know, a business, their day to day kind of activities, operating the business, anything that interrupts that is a challenge and moving everything to an end of year, having defined processes, having certainty at that end of year is often simpler for a lot of organisations. So there's kind of a reluctance to move across. But also at the moment, under the voluntary regime, you still have to do the annual process of the P11d for employer national insurance purposes. So I think a lot of organizations don't see the benefit of having a real time process and also an end of year process.
So some of the benefits are limited there.
09:51
Speaker 2
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Speaker 2
I would agree with what Sarah and Katie have said. It would necessitate a complete process change for a lot of employers. And that requires investment and investment. And it requires it's a cost to employers to change it. I think also getting data earlier from benefit providers is not always possible. That might require contractual changes. And again, that might come with a cost. So employers being reluctant to move their timeframes earlier in the year when it's a cost to them and no real incentive for them.
09:52
Speaker 4
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Speaker 4
I agree with everyone. Everything that's been said already, I think you have a system where you're trying to look at non-cash benefits, which are perhaps traditionally more suited to the form p11d route. Employers are accustomed to that. It's been around for a long time. You've also got the fact that. Because of HMRC s real time information obligation to do it on or before the date of payment that you're looking for that information to be much more readily available. And also within organisations, different departments tend to deal. So you maybe have HR departments and payroll departments, but the departments that the the benefits in kind are cropping up are things like finance, perhaps liaising with external benefit providers as well.
So I think it's maybe a challenge when they haven't had to do it. It's been a challenge to make sure that, you know, there's been no incentive. And as Sarah said, the incentive is largely for HMRC and the employees themselves in terms of calculating the benefit more accurately and in real time. And there are potentially some benefits for employers, but I don't think that can be overstated. Maybe a little bit of a reduction in queries from employees, perhaps fewer PYE coding notices coming through from HMRC, that type of thing, but not a huge amount of real tangible benefits when it does not have to be done that way.
So I think it's maybe a challenge when they haven't had to do it. It's been a challenge to make sure that, you know, there's been no incentive. And as Sarah said, the incentive is largely for HMRC and the employees themselves in terms of calculating the benefit more accurately and in real time. And there are potentially some benefits for employers, but I don't think that can be overstated. Maybe a little bit of a reduction in queries from employees, perhaps fewer PYE coding notices coming through from HMRC, that type of thing, but not a huge amount of real tangible benefits when it does not have to be done that way.
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09:54
Lord Leigh of Hurley
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Lord Leigh of Hurley
Thank you. Can I ask, do you think that this is a sort of reflection of the. Polarisation of views, which is that HMRC sometimes think that businesses are in business to enable them to pay tax and business think business are in businesses and tax is just a pain you've got to go through to carry on in business. Do you think that they've listened enough to businesses about the to to, to not have understood why businesses don't want to do this? I think it's 16,000 out of 280,000 have done it to date from your submissions.
So is there a is there is there a problem within HMRC and not really understanding what businesses are all about, why this has been such a low take up?
So is there a is there is there a problem within HMRC and not really understanding what businesses are all about, why this has been such a low take up?
09:54
Speaker 4
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Speaker 4
HMRC has perhaps underestimated the cost in terms of the administration, especially in year one and the early years of moving to mandatory payrolling. You know you're going to have additional costs when you've got benefits in kind, which are the information's coming through once a year for the p11d. Traditionally, if you've got a weekly payroll run, you're perhaps having to access that information 52 times a year. So whilst there may be. Savings and efficiencies in the long term, once businesses get used to it, and certainly the administration cost and burdens is probably been underestimated by HMRC.
09:55
Speaker 3
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Speaker 3
I'd I'd agree. I'd say at the outset I think there was a belief this would be simple and for most organisations it would be a very simple move and not too demanding on them. To be fair to HMRC, I think in the two years since this has been announced, they are recognising there are complexities, but I don't think those complexities are necessarily getting addressed as quickly or as urgently as we would have hoped to be ready in time for 2027. But they have you know, that is partly what's led to the phased approach. So they are listening.
But I still think there's a gap in their understanding between why businesses are facing challenges and what those challenges are.
But I still think there's a gap in their understanding between why businesses are facing challenges and what those challenges are.
09:56
Speaker 2
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Speaker 2
And I'll add to that. I think maybe there is a lack of understanding of how businesses work and how the data flow works within businesses. Things don't always happen in advance. Reporting is often done after the event data is requested, or data flow happens after things happen, and this requires it either to be known about in advance or to be known about, at least in time for the payroll run, which is quite a big change to some business operations.
09:56
Speaker 1
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Speaker 1
I agree with everything that's been said. I think the HMRC don't always engage with the amount of time that it can take for business to make changes to their processes, and they need they need certainty quite well in advance, so that business can then go and design and test their processes to make sure that it actually works. Because ultimately the the risk is that the business gets it wrong, and then the employees may suffer if things don't work as they're supposed to be.
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09:57
Baroness Wheatcroft
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Baroness Wheatcroft
Given that HMRC seems to have accepted that there are some benefits that simply can't be subjected to this treatment, as it seems that they haven't taken into account that this will then be forcing businesses to use both methods, and that will be more work rather than less. So they might as well stick with one as long as they can. Or do you think that the long term effect, and probably the desired effect, will be to stop employers doing benefits in kind? Anybody have a view on that?
09:57
Speaker 3
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Speaker 3
I don't think necessarily the long term kind of idea is to prevent the provision of benefits in kind. And in fact, I think in some cases, you would hope government would encourage that. So health care, things like that, it's quite employers pay quite an important role in supporting things like that. I think, you know, the Revenue's always had a bit of nervousness about the weight of a full remuneration package and how much of that is cash versus other things, and how much information do they have to understand what those other things are, and that they're kind of being reported and treated correctly?
But kind of to your first point, I do think the revenue acknowledge there will be a dual process and there's going to be complexity with that. There's going to be cost involved with that. And that's something that we're very cognizant of. But I think at the moment, it's the only way we can achieve bringing kind of something in within a reasonable time frame. But it's kind of getting organisations to understand those parallel kind of processes and actually HMRC to understand what complexity that adds an additional cost to organisations.
But kind of to your first point, I do think the revenue acknowledge there will be a dual process and there's going to be complexity with that. There's going to be cost involved with that. And that's something that we're very cognizant of. But I think at the moment, it's the only way we can achieve bringing kind of something in within a reasonable time frame. But it's kind of getting organisations to understand those parallel kind of processes and actually HMRC to understand what complexity that adds an additional cost to organisations.
09:59
09:59
Speaker 4
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Speaker 4
I mean, I would agree that that there are challenges when it comes to valuing some benefits, and I think the two benefits that are being excluded from phase one and phase two of the roll out of mandatory payrolling, they perhaps might require legislative change to help bring about the calculation of those in real time. And I think that's that shouldn't be forgotten about that. But I see no intention on the part of HMRC for preventing benefits in kind. I think it perhaps would even be disadvantageous for the Exchequer, because there's quite a large take of of tax and National Insurance from those benefits.
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10:00
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Speaker 2
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Speaker 2
I think it's going to be very difficult unless unless there's a change to how we how annual reported benefits are valued. So for example, the loans and accommodation, which are essentially the benefits code is written for them to be reported annually. Yes, we can use estimates, but that's always going to require updating during the tax year and then a reconciliation at the end of the year. So there is perhaps a opportunity here to look at how those benefits are valued, whether it is actually possible to to fit them into a real time reporting scheme.
10:00
Speaker 3
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Speaker 3
And I think that's an underlying principle that hasn't been thought about with benefits as a whole. The whole benefits code and everything is written to be an annual process. And actually there hasn't been a step first to go. Should we look at how benefits are calculated before we go to amending reporting? And I think if that had happened first, then actually maybe payrolling would be an easier step because there wouldn't be so many complications with potentially fluctuations happening.
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10:01
Lord Carrington of Fulham
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Lord Carrington of Fulham
Okay. It sounds like a fair old mess, doesn't it? From what you're saying. And from what? Everything's come out. Because if we're going to run two systems in parallel at the same time, it's hard to see how they're actually going to achieve any of the time frames they're talking about. And particularly if not many companies have actually implemented the changes yet, even on the simple p11d reporting requirements, but let alone the more complicated ones, do you see HMRC being able to achieve any of its time frames on this?
10:02
Speaker 4
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Speaker 4
I think from our perspective in our written evidence is in line with this. The need for guidance for employers is really paramount. So we were really supportive when the phased approach was announced back in May this year. We felt that it gave HMRC time to get the guidance right and to consult and to get those technical specifications right, particularly for phase two. I think the reality has been that HMRC has not moved at enough pace and if we had if we had more guidance being published earlier in the year, that would allow employers to realise how the changes will affect them.
So I think the answer to your question will depend on how quickly HMRC s guidance can come out, where there are issues that employers need further clarity on how quickly HMRC can respond to and clarify any guidance. We are. We are concerned about phase two that, yes, we've got 2028 might be seen as a long way away, but HMRC shouldn't rest on its laurels and it's really, really important to to move forward and engage with stakeholders at pace.
So I think the answer to your question will depend on how quickly HMRC s guidance can come out, where there are issues that employers need further clarity on how quickly HMRC can respond to and clarify any guidance. We are. We are concerned about phase two that, yes, we've got 2028 might be seen as a long way away, but HMRC shouldn't rest on its laurels and it's really, really important to to move forward and engage with stakeholders at pace.
10:03
Lord Carrington of Fulham
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Lord Carrington of Fulham
There's not really a long way away, is it? If you've got to make all the changes to the payroll software to make it all happen, and to iron out all the problems of what what items you can put into the new reporting system, what have you got to keep onto the old p11d? Really, 18 months is not a huge amount of time to get all that done. And particularly if you're a very large company and particularly if you're, I suppose, if you're an SME, but above the threshold where you've got to do this, I would have thought some of those would find it a real problem.
Is that your experience with your.
Is that your experience with your.
10:04
Speaker 2
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Speaker 2
Yeah. I think our perception as well is that actually a lot of employers, there's an overreliance on software to pick this up and that actually they're not preparing for it because they think it's effectively something that software or their payroll bureau or an external provider will be able to manage for them. And there is kind of a lack of awareness of the additional data flow and additional processes that they will need to change internally in order to meet their obligations.
10:05
Speaker 3
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Speaker 3
So you mentioned 18 months, but actually we're five months away and we still do not have the software specification in details. And as Adele was saying, you know, employers are going to rely heavily on payroll software providers. And without knowing that information, it's going to be very difficult. Do I think it's realistic? Something can happen by 2020, by April 2027? Yes. And I think those who are already payrolling and actually some very large organisations who have already been thinking about this and have the resources probably will be prepared. I think SMEs are a different in a different arena.
And I think, as Adele said, even those I think there's some that probably aren't overly aware of the change at all. But even those that are aware do not understand what the change means and what they need to do. But I feel the revenue has committed to 2027. I think they'll find that difficult to kind of pedal back from. So it's more what will happen in 2027 if it's going to go live, we need a bit more flexibility. It will go wrong. There needs to be avenues for advice. Where do you go to to ask questions?
But then the big gap. So the revenue have a communication plan that hasn't started. We're five months away. That hasn't started. Sending letters to employers will probably be a bit late in the day, and they're probably going to get a bit lost. But the gap is employees and actually how aware employees this is going to happen. Has the revenue really properly tried to engage with employees? Because I don't think they have, because that's a route to get them to engage with employers, to raise questions. But also in the first year, if it is going to be, go ahead and there's going to be lots of corrections needed, you know, things are going to go awry.
Employers are going to be a bit confused because their pay is going to fluctuate quite heavily. It's quite likely or there's some other complications. So actually, how would you get employees educated to understand what's happened and the impact of kind of this change from April?
And I think, as Adele said, even those I think there's some that probably aren't overly aware of the change at all. But even those that are aware do not understand what the change means and what they need to do. But I feel the revenue has committed to 2027. I think they'll find that difficult to kind of pedal back from. So it's more what will happen in 2027 if it's going to go live, we need a bit more flexibility. It will go wrong. There needs to be avenues for advice. Where do you go to to ask questions?
But then the big gap. So the revenue have a communication plan that hasn't started. We're five months away. That hasn't started. Sending letters to employers will probably be a bit late in the day, and they're probably going to get a bit lost. But the gap is employees and actually how aware employees this is going to happen. Has the revenue really properly tried to engage with employees? Because I don't think they have, because that's a route to get them to engage with employers, to raise questions. But also in the first year, if it is going to be, go ahead and there's going to be lots of corrections needed, you know, things are going to go awry.
Employers are going to be a bit confused because their pay is going to fluctuate quite heavily. It's quite likely or there's some other complications. So actually, how would you get employees educated to understand what's happened and the impact of kind of this change from April?
10:07
Lord Carrington of Fulham
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Lord Carrington of Fulham
Can I just ask one other question, chairman? The thing that puzzles me about this is I don't really understand why HMRC see a benefit in this. I understand there's a theoretical rate cash flow benefit to the Treasury, that they will get some of the tax in on a monthly basis rather than at year end, but that's going to be minimal. I mean, you know, in the great scheme of government borrowing, that's not going to actually change the the needle on the dial at all, but it must actually be costing HMRC quite a lot of money to do it as well.
And the administrative changes inside HMRC, HMRC to cope with going to a computerized system, but particularly doing a dual system for goodness knows how many years they're going to have to do it. Is it does HMRC, in your experience, actually calculate the cost benefit of doing changes like this?
And the administrative changes inside HMRC, HMRC to cope with going to a computerized system, but particularly doing a dual system for goodness knows how many years they're going to have to do it. Is it does HMRC, in your experience, actually calculate the cost benefit of doing changes like this?
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10:08
Speaker 3
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Speaker 3
But I don't know their methodology. And I would anticipate from our experience of other changes, such as off payroll worker changes, the initial investment from HMRC is huge and a massive cost to them of having to kind of build, advise, go out to businesses, you know, kind of engage with them. I would assume what the long term benefit that the revenue we're seeing here, they want to see the bigger picture. And it's not just about money, it's about how getting data in real time, because they want that data and information. But also they've been quite open about it's a lot of admin time for them to process.
I've seen fluctuating figures between three and a half to 4.5 million p11d a year that they process, and that's a lot of work for them in a very finite period. So they have to process all of that, work out how they're going to collect the tax, adjust tax codes. And I think they're focusing on that being simplification for them. And that's the main benefit to them. I question whether we will see that full benefit because as you'll see, there's still going to be this end of year process. And I think the end of year process is going to be a little bit more complicated than might be being envisaged, but I think it will probably still require less actual admin time from the revenue.
So in ten years time, when this is if this is bedded in, I think there probably will be quite a few benefits to the revenue at that time.
I've seen fluctuating figures between three and a half to 4.5 million p11d a year that they process, and that's a lot of work for them in a very finite period. So they have to process all of that, work out how they're going to collect the tax, adjust tax codes. And I think they're focusing on that being simplification for them. And that's the main benefit to them. I question whether we will see that full benefit because as you'll see, there's still going to be this end of year process. And I think the end of year process is going to be a little bit more complicated than might be being envisaged, but I think it will probably still require less actual admin time from the revenue.
So in ten years time, when this is if this is bedded in, I think there probably will be quite a few benefits to the revenue at that time.
10:09
10:09
Speaker 4
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Speaker 4
And then that has to be contrasted with the burden of cost on part of employers. And the other thing I would just add to I agree with everything that Sarah said. The other thing I would add is just from HMRC s point of view, there must be differences in the move to mandatory payroll. And because it's different to the voluntary regime that has been in place since 2016. So when you think of other tax initiatives like making tax digital for income tax, when a business registers for that, they are doing so voluntarily. They're using the same platform as they would be when they're eventually brought in, and mandatorily compare that with payroll and benefits and the voluntary scheme that has been placed since 2016, that is far less onerous, potentially, than the data requirements on employers.
How that comes through on HMRC, one would only assume that there would be a move to some additional system to allow them to incorporate all the different technical specifications and schema that they're requiring to get that data in from employers.
How that comes through on HMRC, one would only assume that there would be a move to some additional system to allow them to incorporate all the different technical specifications and schema that they're requiring to get that data in from employers.
10:11
10:11
Lord Newby
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Lord Newby
To estimate what proportion of businesses will need to run the two schemes in the benefits that are not coming in, in the short term or even medium term? How prevalent are they? Because if it were the case that there were only 10%, say, who were needing to run both schemes, it's a very different proposition than if it were a majority. Do you have any sense of that?
10:11
Speaker 2
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Speaker 2
And I think it's going to be quite a quite a large majority, because it's not you're not just talking about benefits that you don't have to you know, they're not coming in mandatory, not mandated originally. But there's also other exclusions. For example, there's an exclusion for globally mobile employees as well, because it's very, very difficult to get that data. So you're probably talking about quite a lot of employees, employers who either have phase two benefits, so the non-mandated ones or have employees in this exclusion group. And there may be other exclusion groups further down the line.
So I'm not sure I can really suggest a proportion, but I'm thinking probably most employers.
So I'm not sure I can really suggest a proportion, but I'm thinking probably most employers.
10:12
Speaker 3
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Speaker 3
I would say, you know, when it comes to loans, SMEs are, you know, very you've got a lot of direct loan accounts. So actually that's far more prevalent than you might otherwise think. And they're going to be quite competent. Yes, they're carved out, but they'd be quite complicated, I think, to bring into a voluntary regime in a real time regime, because those amounts fluctuate. That's the kind of purpose of them. But I would have thought the revenue was probably best placed to have that data, because they should have this information via the P11d reporting and the current payroll reporting.
10:12
Speaker 4
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Speaker 4
I think it would be. I agree, it would be really difficult for us to speculate as to the number of employers. HMRC has stated quite clearly in terms of the number of employees. Phase one is covering the vast majority of benefits, but you could have 1 or 2 employees, say the directors, and that's one that makes that one employer having phase two or further down the line benefits. As Sarah says, directors loan accounts , very common with the SME owner managed business type market.
10:13
10:13
Baroness Wheatcroft
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Baroness Wheatcroft
Thank you. I just wanted to come back with a quick supplementary, particularly on on new , because you suggested that HMRC would be interested in the information, not just from the point of view of gathering tax. And that sort of thing always makes me feel slightly nervous. What sort of information do you think they might be looking for and why?
10:13
Speaker 3
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Speaker 3
I mean, that's a question we've asked them, because one thing that they're sort of suggesting is copying and pasting the p11d form into the payroll software. So having lots and lots and lots of fields, they seem reluctant to try and think about how to, you know, make that simplify that data. So what do they need data and what do they need data for? And I think it sort of comes back to because like the CEO responded, I think it was a couple of years ago to a consultation where the revenue wanted more data via pay.
And we and I think you also challenged, why do you actually need this data? It's not linked to tax, it's not linked to. And it's putting a lot of burden on employers, I think. So it does seem like they just like to have data, and they don't always make it clear why they need that data and why it's helpful. So we can't really answer that question. But what we do know is that they're reluctant to kind of slim down that data, and they want as much data as possible.
And we and I think you also challenged, why do you actually need this data? It's not linked to tax, it's not linked to. And it's putting a lot of burden on employers, I think. So it does seem like they just like to have data, and they don't always make it clear why they need that data and why it's helpful. So we can't really answer that question. But what we do know is that they're reluctant to kind of slim down that data, and they want as much data as possible.
10:14
Speaker 2
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Speaker 2
I think the original RTI data fields that were published, or something like 126 fields, which has now been reduced to 32, 14 of which are already in RTI part because they're associated with company cars. But those 126 data fields were asking for an awful lot of information about various benefits about, you know, start dates. Cost, cost is probably necessary. But how dates, how far they go back, a lot of information that doesn't necessarily is not necessarily needed in order to calculate the taxable value. So there is a question about why that was ever thought to be needed.
10:15
Speaker 4
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Speaker 4
I would agree with with with what I said there about the number of fields. What a concern we had was and we have had discussions with HMRC on this. It's to do with the fact that if any of these fields are not completed, that could result in the real time information submission being rejected for the whole employers payroll. And that doesn't just affect the employees where there's a particular benefit involved, it affects everyone. So when you're thinking about many of the other employees could possibly be on universal credit. That information is then not translated through to DWP.
So that was one of the reasons why we welcomed that longer period and the phasing approach. And we just need to make sure that HMRC is actually using that time wisely, so that those any issues that need to be ironed out with the data can be done in time for for the phase two coming through, it's. Yeah. But HMRC quite often in recent times has been known for asking for information. That's a nice to have as opposed to what it actually requires for the purposes of the collection and administration of tax.
So that was one of the reasons why we welcomed that longer period and the phasing approach. And we just need to make sure that HMRC is actually using that time wisely, so that those any issues that need to be ironed out with the data can be done in time for for the phase two coming through, it's. Yeah. But HMRC quite often in recent times has been known for asking for information. That's a nice to have as opposed to what it actually requires for the purposes of the collection and administration of tax.
10:16
Speaker 1
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Speaker 1
I agree with everything that's been said. We see the same thing with HMRC asking or creating a proposals to update things and asking for a lot more information than we would see that they actually require. And it is the same questions that have been raised here. What do they need all of that information for? It feels like they just want to have it in case in future perhaps it would be of some use to them, but that is not, from our point of view, acceptable. If they're going to introduce digital systems for taxpayers, it's got to be proportionate.
It's got to be easy to use. And asking for onerous amounts of data is not proportionate or easy to use.
It's got to be easy to use. And asking for onerous amounts of data is not proportionate or easy to use.
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10:17
Speaker 7
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Speaker 7
Thank you. I'm having some issues with sound in the room, so I hope you can hear me. Great. My question was really around the cost to employers that this change is going to impose. How realistic do you think HMRC estimates are around the the cost and the the amount of effort this system is going to impose on employers.
10:18
Speaker 4
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Speaker 4
To offer alternative figures. But I think it's you can say with some comfort that HMRC is. Estimate of the cost for employers is probably being understated. I'm thinking on the need to engage with benefit providers for information, whether that's private medical insurance or car fleet for the benefits and fees, one or other benefits further down the line. When you're needing to engage with external stakeholders on an annual basis, and that then needs to be brought forward to a monthly or a weekly basis that can't have no cost. It's just it's just a mathematical impossibility. So I think that HMRC perhaps I mean, I see in fairness, HMRC, I can't offer alternative costings.
It's not something that we can we can provide, but it just feels that the the cost of compliance for the. Especially in the early years when benefits providers perhaps aren't accustomed to providing information and that timely manner. Now, whether in the longer run, they will increase their charges or have an admin fee for providing weekly or monthly reports that will depend on a case by case basis. But certainly HMRC perhaps needs to revise its cost calculations.
It's not something that we can we can provide, but it just feels that the the cost of compliance for the. Especially in the early years when benefits providers perhaps aren't accustomed to providing information and that timely manner. Now, whether in the longer run, they will increase their charges or have an admin fee for providing weekly or monthly reports that will depend on a case by case basis. But certainly HMRC perhaps needs to revise its cost calculations.
10:19
Speaker 3
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Speaker 3
And I agree with what Chris has said. I think, you know, taking a step back is how does this all work? Not even thinking about data collection and other things. Just looking at the payroll software itself, there will be additional steps. They generally require additional costs. We are looking here at the timelines, do not marry up with all of the different things that employers are required to do, and there's going to be this end of year correction process. Now, what do I mean by timelines? You have at the moment a P60 that has to be issued to employers by the 31st of May.
If you're Payrolling, you have an employee statement on the 1st of June. We're now going to have this end of year correction process, 22nd of July. Now, if you process those corrections you need, your statement to employees is wrong. Your P60 is wrong. And at the moment, a number of payroll software providers cannot provide an updated P60. And if they do, they're going to charge you for it for every single how the corrections are going to be done. We think through the end of year process because it hasn't been clarified yet, will be updated submissions through the payroll, and that's a submission per employee.
And even after that, if you see an error, it's a per employee submission. So if you've got a complex benefit and you need to amend it for a thousand employees, you're doing a thousand submissions. Payroll providers will charge you for every single submission. So all of those costs, you know, you've actually got real time costs. And if something goes wrong, potentially professional advisor fees as well. And then or if the revenue pick something up, you might end up with a compliance review. So even you might have advisor fees, you might not, but the admin and time costs as a business to deal with that review.
So I do think the kind of costs have been underestimated. But obviously we're not placed best place to kind of calculate those.
If you're Payrolling, you have an employee statement on the 1st of June. We're now going to have this end of year correction process, 22nd of July. Now, if you process those corrections you need, your statement to employees is wrong. Your P60 is wrong. And at the moment, a number of payroll software providers cannot provide an updated P60. And if they do, they're going to charge you for it for every single how the corrections are going to be done. We think through the end of year process because it hasn't been clarified yet, will be updated submissions through the payroll, and that's a submission per employee.
And even after that, if you see an error, it's a per employee submission. So if you've got a complex benefit and you need to amend it for a thousand employees, you're doing a thousand submissions. Payroll providers will charge you for every single submission. So all of those costs, you know, you've actually got real time costs. And if something goes wrong, potentially professional advisor fees as well. And then or if the revenue pick something up, you might end up with a compliance review. So even you might have advisor fees, you might not, but the admin and time costs as a business to deal with that review.
So I do think the kind of costs have been underestimated. But obviously we're not placed best place to kind of calculate those.
10:21
Speaker 2
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Speaker 2
Yeah, I'd agree with that. And I'd agree that I'd add to that that if if you are using estimates as well, because you can't value your benefit at the beginning of the tax year, then it's likely that there'll be a cost in using in calculating those estimates and then updating those estimates when the value becomes known during the tax year as well.
10:21
Speaker 1
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Speaker 1
I would just add that maybe HMRC have not estimated exactly how this will affect the internal workings of a business, because I think there's there's a sort of they believe that the staff that exist already within a business will be able to take over this new process quite easily and see it as a simplification. But actually, it may be that there's a big difference between having one member of a payroll or HR team working on something for a month in the year, versus having to work on something continuously throughout the year, because they may not actually have the time to dedicate to this continuously throughout the year.
So I could see it being very likely that businesses actually have to employ more staff in order to do this. And within there may be communication with departments within a large business, with other teams who have information that's needed, and they might not also have the time. So I think that this will actually impact quite a lot on how internally businesses are running.
So I could see it being very likely that businesses actually have to employ more staff in order to do this. And within there may be communication with departments within a large business, with other teams who have information that's needed, and they might not also have the time. So I think that this will actually impact quite a lot on how internally businesses are running.
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Lord Leigh of Hurley
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Lord Leigh of Hurley
Thank you. Just to go back to the first point, really, which is that HMRC and and Katie's point, which is HMRC just seem oblivious to the trouble they put businesses to, to make life easier for them. Is there any precedent in such measures having an exemption for micro or SME businesses? And if so, is there any window? Do you think that within HMRC that might be sympathetic to that plea?
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Speaker 4
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Speaker 4
I think it's a really interesting suggestion. From a practical level, I can see the merits in small or medium sized businesses. My my thoughts and immediate thoughts in terms of the practical day to day operation of such a move would be if business goes above or below the threshold, how that would work in practice. But there are as many challenges for larger employers. Perhaps the benefits and phase two and beyond. Compared with smaller employers. As we stated in our written evidence, many of the issues depends on the types of benefits that are being provided as much as the size of the employer.
So if you think of large firms employing tens of thousands of employees, say, retail businesses, they might have a large number of employees, but they don't necessarily have a large number of complex benefits being provided. But if you've got a small business, it might have a director, might have large, complex benefits and many of which are in phase two. And so it, it's very difficult to, to tell on, on size of the business that doesn't necessarily correspond with the complexity and the practical challenge that the move to mandatory payroll would bring.
So if you think of large firms employing tens of thousands of employees, say, retail businesses, they might have a large number of employees, but they don't necessarily have a large number of complex benefits being provided. But if you've got a small business, it might have a director, might have large, complex benefits and many of which are in phase two. And so it, it's very difficult to, to tell on, on size of the business that doesn't necessarily correspond with the complexity and the practical challenge that the move to mandatory payroll would bring.
10:24
Speaker 3
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Speaker 3
But it is, I think, an interesting point you raise. And I think the closest example I can think of is actually when real time information reporting was introduced and the revenue did do that as a phased in approach by size of organisation. So the largest came in first and it, I think it was over an 18 month period. And then the very smallest. I think some organisations are still carved out of real time information for certain reasons, but most are in. But it was a phased approach to kind of then give smaller organisations time to kind of adapt to that change.
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Speaker 2
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Speaker 2
I suppose a similar for auto enrolment as well. But I would agree that I think larger employers might often have the more complex benefit packages, more more likely to have multiple benefit providers need to get data from various sources. And it might not always be that it's easy for them to do it. It might be that they're more able to fund it, but it might not be a simplification still.
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Lord Liddle
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Lord Liddle
I mean, I'm interested in just exploring a bit more what you think HMRC s motivations are in wanting to, to increase the pace of this modernisation. I suppose one might be a technological thing. You know that in the modern world it's ridiculous to still be dealing with bits of paper. Second, they may be under some kind of staff reduction target that they have to meet and that the as part of some efficiency measure that the government is putting on them. And the only way they can do this is by, you know, computerization and trying to reduce manual tasks as much as they can.
The third is, I suppose, is do you think that HMRC thinks that benefits in kind are a major source of people avoiding tax and are. And this is one of their routes into trying to tackle the tax gap, which is often referred to in terms of many billions of pounds.
The third is, I suppose, is do you think that HMRC thinks that benefits in kind are a major source of people avoiding tax and are. And this is one of their routes into trying to tackle the tax gap, which is often referred to in terms of many billions of pounds.
10:27
Speaker 4
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Speaker 4
I think there are a few potential motivations as I see them for. For HMRC and the acceleration of the collection of tax on benefits in kind. I'm thinking, for example, if you had an employee who started receiving a benefit in April this year that wouldn't be reported on a P11d until the end of the tax year, then takes time to be included in the employees pay coding notice. So you could have a lag in that extreme example of of well over a year between the benefit first being provided and any tax being paid. And the other advantage that I think HMRC would see themselves as benefiting in terms of the move towards a more digital first organisation.
And there's a lot of noises and evidence that HMRC is moving in that direction because it wants to do things more efficiently and more digitally. And lastly, in terms of p11d, there have been some challenges when it comes to amendments. So although the P11d itself can be submitted electronically to HMRC, the any amendments under the current system have to be manually processed by a member of HMRC staff, so they may well see that that burden is passed on to the employer to then correct that yes, as needed.
And there's a lot of noises and evidence that HMRC is moving in that direction because it wants to do things more efficiently and more digitally. And lastly, in terms of p11d, there have been some challenges when it comes to amendments. So although the P11d itself can be submitted electronically to HMRC, the any amendments under the current system have to be manually processed by a member of HMRC staff, so they may well see that that burden is passed on to the employer to then correct that yes, as needed.
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Speaker 2
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Speaker 2
I think there's an argument that it could be. And also the initial data requirements was perhaps to ensure that the benefits are being reported correctly by requiring all that data to ensure to work out where the valuations had come from. I think. That when it was when this measure was first announced, the idea that was that the P11d would no longer be required and that would have been a big cost saving to HMRC if they didn't have to process them anymore. Obviously, that's no longer going to be the case and won't be for for several years.
So perhaps that has changed since this measure was initially announced.
So perhaps that has changed since this measure was initially announced.
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Speaker 3
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Speaker 3
When you reference corrections very, very broadly, there were kind of, I would say two categories or routes of correction under Payrolling. So one will be making corrections through the payroll software itself, and one is through some form of liaison with the revenue. So whether that's making a voluntary disclosure, when you make an error or some form of review from the revenue that triggers the discovery of an error and having to correct that. And in the second piece, actually how that works, how you calculate time periods are different for payroll and p11d items, which adds a bit of complexity.
So maybe there's, you know, a benefit to the revenue of having one streamlined system so that if something needs to be corrected, there's kind of, there could still be the two kind of categories. But on the second category, there's one clearer route, and that's perhaps linked as well with, you know, the consultation to align the National insurance recovery with tax and recovery timelines and bring that in. So actually, it has a simplified route. If you're going down this inquiry or disclosure route.
So maybe there's, you know, a benefit to the revenue of having one streamlined system so that if something needs to be corrected, there's kind of, there could still be the two kind of categories. But on the second category, there's one clearer route, and that's perhaps linked as well with, you know, the consultation to align the National insurance recovery with tax and recovery timelines and bring that in. So actually, it has a simplified route. If you're going down this inquiry or disclosure route.
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Speaker 4
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Speaker 4
I would say, and again, this is supported by our written evidence that it's very much a it could have that potential outcome. However, there's quite a few areas where there's a lack of clarity in terms of what the rules mean. And we are also mindful of the fact that HMRC has a system of one to many letters, and it's not quite clear to us how that quite fits in with the the the move to either have taxpayers having a duty to notify HMRC when they become aware of an issue or the. The correction notice that HMRC could could send to taxpayers.
The other observation that we made as well is that the guidance and the proposed legislation doesn't make clear . At what point is a taxpayer has a taxpayer become aware that an error has arisen. So it's a little bit ambiguous as to is it immediately when it's first came to light, or are they afforded some opportunity to establish the facts and then form a
The other observation that we made as well is that the guidance and the proposed legislation doesn't make clear . At what point is a taxpayer has a taxpayer become aware that an error has arisen. So it's a little bit ambiguous as to is it immediately when it's first came to light, or are they afforded some opportunity to establish the facts and then form a
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Speaker 2
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Speaker 2
How they manage their own internal processes. And that obviously now extends year two, which we don't have a full idea of what that's going to look like yet. And I think there is a misconception in some ways that the mandatory process is going to be very much like the voluntary process, which is very much a lighter process. So I think we're going to see a lot of.
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Lord Leigh of Hurley
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Lord Leigh of Hurley
Of pay and. benefits are wider than my arm's reach. Yes. That's an HR and benefits function. That's a pay function. So the specialism of that sits over in the HR not not in pay. So actually you've got not just the fact you're going to have to run this every pay period rather than the end of year. And it's, it's always run at the end of year because it takes time to actually, you know. recalculate everything from, from, from the employer's perspective. But then you've got to make sure that then the, there's effectively an education and handover from HR and benefits, but there can't be because it's on two phases.
And even after phase two , loans and accommodation won't be in phase two. So there will still be a need for the HR. function to be. performing this. And we we, we're concerned that also the data which some of it needs to come from the benefit.
And even after phase two , loans and accommodation won't be in phase two. So there will still be a need for the HR. function to be. performing this. And we we, we're concerned that also the data which some of it needs to come from the benefit.
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10:47
Lord Leigh of Hurley
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Lord Leigh of Hurley
Be that the car leasing company or the private medical company that data needs to become and be. available to be used by the payroll function. So there's, there's a lot of moving parts that haven't really been fully considered and brought in, despite strong requests from us all to be doing that. So our general observation is most employers at the moment are not prepared at all for this. They expect the. software to resolve this all for them, which it's going to be incredibly difficult to do because it specialises in Paye, not a. mandatory tax piece. Over there.
So we think actually in the short to medium term, it's actually going to. increase burden and. processes rather than simplifying them. And the long term is just questionable to how well HMRC systems deal with all of this. Because probably I'm sorry segue to another point, but RTI is bursting at the seams. And we actually need new technology to be able to effectively exchange data with HMRC. So I think there's a. misunderstanding that software will solve it all. And whilst we generally very good. It's only as good as actually the processes. And we've still got outstanding information.
So it's in the short to medium term spot on. I think it's actually going to increase. overheads and burdens for businesses. Now they'll all do their best. Payroll people are fabulous. Yeah. They're so diligent. You know they will not, you know, go past go and collect £200. Unless unless they've they've got all of the qualifying criteria.
But the worry is .
So we think actually in the short to medium term, it's actually going to. increase burden and. processes rather than simplifying them. And the long term is just questionable to how well HMRC systems deal with all of this. Because probably I'm sorry segue to another point, but RTI is bursting at the seams. And we actually need new technology to be able to effectively exchange data with HMRC. So I think there's a. misunderstanding that software will solve it all. And whilst we generally very good. It's only as good as actually the processes. And we've still got outstanding information.
So it's in the short to medium term spot on. I think it's actually going to increase. overheads and burdens for businesses. Now they'll all do their best. Payroll people are fabulous. Yeah. They're so diligent. You know they will not, you know, go past go and collect £200. Unless unless they've they've got all of the qualifying criteria.
But the worry is .
10:48
Speaker 3
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Speaker 3
That's very interesting. Thank you Andy. Yeah I would very much agree with Matthew and Kevin's points raised there. So I won't I won't repeat those. But I suppose if the exam question is, you know, will this regime make life easier for our members? I can't give you a direct answer. It's yes and no because it's a mixed picture across the board. I mean, we. represent businesses of a range of sizes from very small to very large.
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Speaker 3
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Speaker 3
They're not too worried about it. They are relied on their software providers. And I know everything is hanging on those technical specifications. And also, you know, a lot of small. businesses rely on external advisers as well, because a lot of small business owners have to wear many hats and, you know, with compliance.
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Speaker 3
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Speaker 3
Benefits for quite some years now since it was. introduced just over about ten years ago. Some of our members do have. complex reward and benefits offers, so they might need to. engage and collaborate with a number of. external reward providers. Also, different large groups can often have subgroups with different financial systems. So at at the moment for for that.
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Speaker 3
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Speaker 3
It is a challenge to see if all of those systems can be. interoperable to , to have most of it automated. But what I would say it's important to note that that human judgment element, that is a really crucial part in being compliant, because our tax system is very complicated. A lot of the treatment of some of these benefits is quite subjective. So I think, you know, if we're moving towards real time.
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Speaker 3
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Speaker 3
Employers and medium and small employers? I would say things are probably only going to become clear. I would say year three and beyond. I do think it is going to be a massive hurdle for a lot of larger businesses. In the first two, two years of the phased implementation. So I think a lot of those. businesses won't be able to. reliably or confidently tell whether they will have .
10:52
Speaker 2
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Speaker 2
Savings in the longer term. I think to to expand on that as well, we've we've got to look at things from the individual point of view. And I think what's going to happen is next year there's going to be a greater. visibility of what benefits they are receiving and more importantly, what the cost of those benefits is. Yes. And the ability for them to assess whether those benefits are of value to them, because it's essentially going to be on the payslip. So from the employer perspective, it's demonstrating that value, but also being prepared to deal with the burden of having those conversations and explaining the value to, to those individuals.
And just to pick up really quickly on a couple of things that Andy mentioned, where you have outsourced payroll providers or accountancy services in the mix, it adds that extra layer of. complication that any payroll policy will do. But because you've got that sort of man in the middle where data flows are really required to be quick and.
And just to pick up really quickly on a couple of things that Andy mentioned, where you have outsourced payroll providers or accountancy services in the mix, it adds that extra layer of. complication that any payroll policy will do. But because you've got that sort of man in the middle where data flows are really required to be quick and.
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Speaker 2
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Speaker 2
But because that's removed, there's going to be a hit to their revenue and that's essentially going to have to be absorbed somewhere. And payroll services are likely to be where that revenue is, is recouped essentially. So not to pre-empt sort of maybe further questioning, but I think the, the cost to businesses maybe is more than we might.
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Lord Leigh of Hurley
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Lord Leigh of Hurley
Outsourced, regardless of whether their payroll function was in-house or outsourced. And therein lies also, our worry is that that may well be a separate company. Yeah. Or at least a separate division of a company. So how do you actually make sure that the outsourcer that's doing all the expenses for the p11d knows they've got to provide the. information to the to those that are running the payroll function, be that. in-house or be outsourced. So I think that that is a significant concern. And also the effectively, the. compliance need, if you will, is upon the employer.
We've we've pushed HMRC a lot for, for months and months, if not over years to engage with the benefit providers. But there's, there's, there isn't a great will. And it's only recently in the past month. And that that meeting was only just with the like a trade bodies of these who didn't seem to have a great deal of interest or impetus, if I may say so, that you know, that that's quite worrying because we're whilst at phase one, there's only like seven new data items, you know, most of those still will have to come from these benefit providers.
But also the way it's structured, you're going to have to like with certainly with medical, you're going to have to basically, if they've got like dental and, and private medical, you're going to have to combine the two. So you can have to do some sort of key calculations. And again, those sort of functions have been set in the HR world, not in the payroll world. And lastly, to build on both Matt's and Andy's point, it's a highly pressurized. environment doing payroll. You're really aren't you up to the limit? Yeah. With all changes. Oh, sorry. We forgot this.
Over time, it's really important that person's going to walk or we've got starters, levers. It's all last minute.com. And therefore it's a highly pressurized. And we saw in Covid a lot of people leaving. Yeah. That whole payroll environment because of the additional pressure that Covid has brought in. So it's only starting just to recover from that point of view. So our worry and also as a software body is the whole value chain we're concerned about.
And therefore we can't have.
We've we've pushed HMRC a lot for, for months and months, if not over years to engage with the benefit providers. But there's, there's, there isn't a great will. And it's only recently in the past month. And that that meeting was only just with the like a trade bodies of these who didn't seem to have a great deal of interest or impetus, if I may say so, that you know, that that's quite worrying because we're whilst at phase one, there's only like seven new data items, you know, most of those still will have to come from these benefit providers.
But also the way it's structured, you're going to have to like with certainly with medical, you're going to have to basically, if they've got like dental and, and private medical, you're going to have to combine the two. So you can have to do some sort of key calculations. And again, those sort of functions have been set in the HR world, not in the payroll world. And lastly, to build on both Matt's and Andy's point, it's a highly pressurized. environment doing payroll. You're really aren't you up to the limit? Yeah. With all changes. Oh, sorry. We forgot this.
Over time, it's really important that person's going to walk or we've got starters, levers. It's all last minute.com. And therefore it's a highly pressurized. And we saw in Covid a lot of people leaving. Yeah. That whole payroll environment because of the additional pressure that Covid has brought in. So it's only starting just to recover from that point of view. So our worry and also as a software body is the whole value chain we're concerned about.
And therefore we can't have.
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11:00
Baroness Wheatcroft
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Baroness Wheatcroft
Any. Thank you, Baroness Wheatcroft. Listening to you. One might believe that this was a measure that had very recently been dreamed up by the government, but it's been on the cards for a long time now, and quite clearly. consultation hasn't been hugely effective. I'd be really interested to hear your views on what. consultation there has been. I mean, clearly not with the trade bodies reporting to you, Kevin.
And if there is any. chance of the first. deadline in April being met, what the government could and should do .
And if there is any. chance of the first. deadline in April being met, what the government could and should do .
11:00
Speaker 3
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Speaker 3
Between now and then. And you, Andy? Yeah, sure. I mean, I, I. believe it was originally. proposed in an OTS paper some years ago when the OTS was around. I'm sure a lot of people missed the odds. So it has been there in, in the tax policy world as a concept for some time. But also, you know, this has been on the cards. I mean, certainly more. intensely over the. last two and a half years. There's a mixed. picture on our members feedback on engagement with HMRC. Personally running our employment taxes working group , HMRC policy team have always been.
available when I've. strategically needed them to have that direct engagement with members. I think our main gripe was that it was originally announced, I think was it . January 24th in a. simplification update, and our members felt they just hadn't been that consult enough consultation at that point. So when we did really get in there with the. engagement and bluntly told them, you know, larger businesses in particular do need about 18 months, sometimes two years to implement a new process because their.
systems and.
available when I've. strategically needed them to have that direct engagement with members. I think our main gripe was that it was originally announced, I think was it . January 24th in a. simplification update, and our members felt they just hadn't been that consult enough consultation at that point. So when we did really get in there with the. engagement and bluntly told them, you know, larger businesses in particular do need about 18 months, sometimes two years to implement a new process because their.
systems and.
11:02
Speaker 3
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Speaker 3
Are very complex. And we felt that HMRC and obviously the minister who has to sign it off did did listen to to that concern over timescales. In our Spending Review submission last year, we called for the regime to be delayed, and we were grateful that the minister who has returned, he announced that delay last April for one year. But I think what I'm hearing from our members is the nitty gritty.
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Speaker 3
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Speaker 3
Announced they are sticking to that deadline. We we have I mean h the HMRC policy team, they have been open with us in terms of. unpublished guidance. privately to a select few of our members. So quite a few of our specific member responses on that front, which were privately sent to HMRC, have been very stern. I'm hoping that as we move along, I.
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Speaker 3
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Speaker 3
If that software provider has kind of said worked with HMRC to say, you know, we're not going to be ready in time with those technical specifications. If particular businesses are reliant on a particular software provider, then I think there should be an easement there as well. Also importantly, to note, HMRC software strategy published in March, I think it was section.
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Lord Leigh of Hurley
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Lord Leigh of Hurley
It was literally that. And there was a very low take up and it was a, it was a lot of work for our members to actually do it and quite a low take up from their customers. But there's also a misbelief that because voluntary payrolling is still going to be supported in phase one of next April, that happy days. Yes. Unfortunately not. There's quite a few changes to the voluntary payrolling structure, to the payments. associated with the class one A particularly. So there's quite a lot of. misunderstanding out there because of this. This piece we actually we escalated this at the beginning of this year.
Having said, going back to your good point of.
Having said, going back to your good point of.
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Lord Leigh of Hurley
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Lord Leigh of Hurley
They've not taken us up on that at all. And I think part of that in, in some fairness, is that they haven't been resourced properly for this. They don't have the. capabilities and the breadth and depth of people that's needed. And they're coming from a certain. regime that just looks at life, you know, through the classic P11d annual.
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Lord Leigh of Hurley
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Lord Leigh of Hurley
Not in a payroll, real time information world. And you can understand if you sat back and thought, well, that makes sense, we'll just pass it across to their. But unfortunately, they didn't engage with us and didn't really understand the value chain as I describe it. Yes. So all of those functions, all of those roles, and what dare I say , little information has been made available, only looks at what we call the happy path. So if everything works well, you know, you get this information, it has to have this, this data. We still haven't got the calculations, but that then gets passed over.
Yeah, but what if it goes wrong? And believe me, there's a high chance.
Yeah, but what if it goes wrong? And believe me, there's a high chance.
11:08
11:08
Lord Leigh of Hurley
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Lord Leigh of Hurley
In the early days, it will do for the reasons we've we've discussed earlier. So there's there's real concern of this. And speaking also with some members yesterday, they were saying, well, actually, we're having to. assume a number of things on the basis of what we've been told so far, and we won't know if it works until actually we start sending things into the test system from HMRC.
11:08
11:08
Lord Leigh of Hurley
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Lord Leigh of Hurley
Despite so many requests and offers, they've not engaged with us HMRC for the test system because we said that for early early days, it's critical we help you get the test system right and that's got delayed because they've changed supplier. Why would they do it at this point I don't know. So that's got delayed by over a month. The main testing system. But also if you're a software provider like payroll, you're highly diligent. You only work with zeros and ones, ons and offs, you know, fact, yes or no. You can't be in this world of assumption and hoping that things and then trying to have enough time, and particularly to Andy's point, some of these, you know, not not just large, but medium and some smaller firms want to actually do their own testing before this goes live.
So they need time to do all this. And we've got this little thing called Christmas and New Year getting in the way as well. And a lot of larger businesses will have a code freeze, you know, for at least a month, if not six weeks over the festive period where they will not. accept any changes. And so therefore, you can't get anything even if you had .
So they need time to do all this. And we've got this little thing called Christmas and New Year getting in the way as well. And a lot of larger businesses will have a code freeze, you know, for at least a month, if not six weeks over the festive period where they will not. accept any changes. And so therefore, you can't get anything even if you had .
11:09
Lord Leigh of Hurley
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Lord Leigh of Hurley
In this side of Christmas. So HMRC into the employers. Yes. As a software provider, you can't get your software into a number of those employers because of this. So it's, it's really it's really. problematical just from that point of view. So, you know, we are doing our best. But, you know, when we come back, if we look at the escalation we did back in February time, you know, where the decision was then taken to do the phasing. There was also no. consultation on what would good look like. Yeah. So so if I may use exhibit A, we actually developed a risk and issues log and the top 20 items.
And this was done with all methodology that HMRC uses as well. Out of the top 20 items. 16 were mission critical red. Yeah. And this goes all the way from. specifications through to. training into into.
And this was done with all methodology that HMRC uses as well. Out of the top 20 items. 16 were mission critical red. Yeah. And this goes all the way from. specifications through to. training into into.
11:10
11:10
Lord Leigh of Hurley
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Lord Leigh of Hurley
Employee guidance and all of those aspects. We did a review at the beginning of the week. I think you might notice very little difference. In fact, there's one more red. So it's very. unfortunate that we've not been able to that quality of engagement. And I say I think they are constrained on resources. But when you as we've done back in.
11:11
11:11
Lord Leigh of Hurley
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Lord Leigh of Hurley
Make all these offers and nobody takes you up on it, there doesn't seem to be a trust and belief. And I've been quite a pivotal member of that software strategy, working with HMRC on the whole transformation strategy, just asking a number of HMRC folk. And one of my key points is you made a great point, Andy. It does not live and breathe any of the. values that we're working towards in the software strategy. And I think it's just symptomatic of the regime over there with benefits. And I say not having the right and enough people to work with.
So they've had to be very, very. constrained how they've gone about this. And so they've worked with us more since the phasing announcement, because we've got this up to ministers.
So they've had to be very, very. constrained how they've gone about this. And so they've worked with us more since the phasing announcement, because we've got this up to ministers.
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11:12
Lord Leigh of Hurley
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Lord Leigh of Hurley
The overheads and the rush and panic for employers and the outsourcers that do the payroll for them and the quality of data HMRC are going to get. Yeah, because it's it's only as good as what goes in. Yes. And the software will do its best to present this. But actually there's got to be a lot of manual interface. It's not all super .
11:13
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11:13
Speaker 2
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Speaker 2
Worked out, isn't as developed as you hope it could be to, to jump into that, I think the the crunch point is now for software providers to be able to provide things to employers. And that's the pivotal point we're at at the moment where if software doesn't. understand what needs to be implemented to the fullest.
11:14
11:14
Speaker 2
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Speaker 2
The employer education can't happen. And we we know that there's some planned. communications going out to. employers very shortly. And while that is a good thing, I think there's also a risk there that we will see the. acknowledgement of the extent and size of this change really come down on employers, but the. understanding doesn't necessarily increase. And as we get more towards the start of the tax year, we need to have that employer understanding to know their obligations.
You know, the the software side of it is .
You know, the the software side of it is .
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11:14
Speaker 2
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Speaker 2
But employers understanding what their software provides them is critical because at its essence, and I think this sort of ties into what we were just discussing about the sort of scope of the project. I think there's a view sometimes that this is just been an RTI change. This has just been some changes to how things are reported through RTI. And I could we could talk about whether we think RTI is the right place for it or not.
That's maybe a different.
That's maybe a different.
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11:15
Speaker 2
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Speaker 2
Of what goes into it. Payroll software at its base level will be. required to report these RTI fields. What it is not required to do is to assist you with what. data gets put into those RTI fields, so you will have a wide range of software. Some software may not need to provide that. If it's for a niche sector that doesn't necessarily provide benefits as a due course of business, but the larger software providers will have to implement this to a reasonable extent to support the employers. So it's how do we. educate that vast range of.
employers who need the extra support and those who don't? Because I think we're reaching that point now where if they don't understand their. obligations shortly, there will be very much a crunch period on the run up to April as they reassess their processes, structures and data flows internally. And that's something that CRP and Buster are working on to sort of how can we represent our members and update them in the absence of any more.
employers who need the extra support and those who don't? Because I think we're reaching that point now where if they don't understand their. obligations shortly, there will be very much a crunch period on the run up to April as they reassess their processes, structures and data flows internally. And that's something that CRP and Buster are working on to sort of how can we represent our members and update them in the absence of any more.
11:16
Speaker 4
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Speaker 4
And employer assistance from HMRC? If I can just follow up on that, I mean, we've we've heard that as we head towards the end of the year. systems sort of shut down effectively for changes. So we're looking at the next four weeks or so in terms of being able to adapt systems. Do you do you think if you were going to make a.
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Speaker 2
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Speaker 2
Of the speed of change that you've seen so far. I think if you look at the policy costings within the budget, you'll find why ministers are reticent to push it back any further, because there is obviously an impact on the Exchequer. And that. essentially was the compromise to the phased approach is that HMRC will get the data on the most commonly provided.
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11:17
Speaker 2
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Speaker 2
As well as the sort of work that's already gone into it. I would be very surprised if it did get pushed back further. However, we are in the process of putting together some. recommendations on easing some admin burdens, particularly around the end of year. process . That should reduce the. complication of some of the employer.
11:18
Lord Leigh of Hurley
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Lord Leigh of Hurley
Requirements through that. But I'll defer to, I, if I may, just just on one piece, just for absolute clarity. So is the software industry working also? We work together also working with HMRC. Is that the crunch point was actually May of this year. So in, in in March we actually gave HMRC a timetable and said we have to have all the technical details by May at the latest. Yeah. And that that that hasn't happened. There's been drip feed of certain information and unfortunately not with us being able to review and check everything first with a view that in September at the very and this is all very latest, very latest September for testing systems with us to have a fighting chance of being deploying now.
Yes. Testing doesn't still come out till middle of next month for the full testing services. There's still some clarity, as I mentioned earlier, about the. specifications and a lot of assumptions. So, you know, on a wider look at the. employer perspective, especially, you know, the crunch is is now, but actually from a software.
Yes. Testing doesn't still come out till middle of next month for the full testing services. There's still some clarity, as I mentioned earlier, about the. specifications and a lot of assumptions. So, you know, on a wider look at the. employer perspective, especially, you know, the crunch is is now, but actually from a software.
11:19
11:19
Lord Leigh of Hurley
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Lord Leigh of Hurley
We're very much on catch up and having to work on a lot of. assumptions for this. We still think it's just about deliverable. We are a little bit worried that there may be some. surprises announced yesterday in the budget. Fortunately, not too many for Paye perspective. But but that's you know, we're so we're completely on the back foot for, for this piece. And whilst I mentioned about some businesses having this code freeze, that tends to be some of the, the definitely the.
corporates and some of the large to medium.
corporates and some of the large to medium.
11:19
11:19
Lord Leigh of Hurley
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Lord Leigh of Hurley
The small to medium size, a lot of those are now cloud based deployments. So that. effectively you'll actually, you know, update the cloud version of the payroll. And that will be done probably very early next year. But the problem with like to Matt's point is like all the training you need to do all this training internally with software companies, training of.
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11:19
Lord Leigh of Hurley
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Lord Leigh of Hurley
That whole handover, how do we get the HR benefit function to make sure it's working with the payroll function? And I think, if I may, sorry. The last thing I think we're completely missing in all of this is simplification. So you mentioned a little earlier, Andy, is that it doesn't seem to be particularly things like loans and accommodation is incredibly complex. And that's why it's outside the scope of phase two at the moment is we've not seen any real focus on simplification. It's almost a question of lift and shift. Yes. Whereas actually what an. opportunity to simplify.
And if we did have a delay, what a fantastic. opportunity to look at the. simplification .
And if we did have a delay, what a fantastic. opportunity to look at the. simplification .
11:20
Speaker 2
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Speaker 2
Rather than just working with the current incumbent, if I may put it that way. And I think just really quickly, the sort of deadlines that Kevin mentioned, correct me if I'm wrong, a lot of that is kind of based around we're getting things fed to us at the. moment based on the normal timescales, because it's assumed to be just an RTI change, but the sort of background architecture within the software means that software providers have to do a lot more than just filling RTI data fields. And that's the sort of education piece for employers and software in the not .
11:21
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Speaker 3
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Speaker 3
Because that's kind of key to the whole process. But I'll hand over to Andy. Yeah, sure. I mean, really, yeah. Good points on education. I mean, there was some HMRC. research on. understanding the implications of business Tax. Administration published last May, and I think they had just over. 1000 business respondents to a survey and around 200 agents. But it was found, I think. 22% of the respondents said that that it's that education piece on rolling out software internally, but also getting that external support as well. That increases their costs overall in the short term and also as well.
I think the way the tax system is going, it's not just the role of an external advisor or an in-house tax team anymore. They have to work with. multiple internal.
I think the way the tax system is going, it's not just the role of an external advisor or an in-house tax team anymore. They have to work with. multiple internal.
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Speaker 3
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Speaker 3
External reward providers. external car leasing data points as well. So there's a lot of like moving parts as well. And of course, anyone. outside an in-house tax team is not a tax expert. And tax rules are very complicated. And tax teams do have that added pressure of being a bit of a Google. Translate of our complicated tax code to the layperson. So that education piece is absolutely vital , because all of those different cogs within a larger business do need to seamlessly gel together and operate for the rollout. What I would say as well, just to be balanced, because I don't want to be all doom and gloom, there is a there is a sizeable population of our members who are feel really prepared and are comfortable with it and are ready, and they're saying to me they wouldn't have any problems with the.
April 27th deadline. So, I mean, it's a it's a mixed picture on crunch points. But, Kevin, you made a really good point on. simplification as well, because I think we're just looking at this regime in one angle. And I think what needs to happen is policy makers need to take a step back and take a. synoptic view of the tax. regimes in this.
April 27th deadline. So, I mean, it's a it's a mixed picture on crunch points. But, Kevin, you made a really good point on. simplification as well, because I think we're just looking at this regime in one angle. And I think what needs to happen is policy makers need to take a step back and take a. synoptic view of the tax. regimes in this.
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Speaker 3
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Speaker 3
To the tune of millions of pounds, and and that was. automatically being referred to debt management. And they were having bailiffs coming out to their premises to pursue debts that the business itself. genuinely backs up in their records, believe that they didn't know. Now, some of it is user error. And what I would say the particular team at. HMRC have been really supportive to our members and have been very generous to give our members their time to resolve a lot of these issues. I know over the last year, when I last got data towards the end of last year, I think the team trying to deal with these disputes had managed to.
reduce the the caseload by around 45 to 50%. So there is a marked improvement. And I know there's recently guidelines for. compliance issued as well to to help. taxpayers minimise and prevent user errors with the RTI regime at the outset. But the regime does need.
reduce the the caseload by around 45 to 50%. So there is a marked improvement. And I know there's recently guidelines for. compliance issued as well to to help. taxpayers minimise and prevent user errors with the RTI regime at the outset. But the regime does need.
11:25
11:25
Speaker 3
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Speaker 3
Of taxes to different taxes and different tax periods, and also provide a clear audit trail as well. So what I would say to the people in charge of. prioritisation of business cases, HMRC, is to. absolutely row in behind those teams in operation, sorry, HMRC carrying out those operations because it affects multiple.
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11:26
Speaker 3
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Speaker 3
That is just going to. exacerbate a lot of those issues. So I would say if you're thinking of the whole regime as a building and mandatory payroll and benefits in kind is putting in some double glazing. I would say the RTI system is probably a long running. subsistence issue for around 13 years. And, you know, you would want to do that those fixes in a logical .
11:27
11:27
Lord Carrington of Fulham
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Lord Carrington of Fulham
Expand further on these fascinating questions. The phasing is very interesting, but the exclusion of some benefits coming into this until manana, particularly as I understand it, loans and housing. Most companies or a lot of companies, particularly big companies, are going to have to run p11d systems in parallel with these systems. HMRC are going to have to receive P11d in the current manual way, as I understand it very largely, and are going to have to run in parallel with all the IT sorting out all the IT problems from their end, which I suspect you talked about the IT problems at the employers end, but the HMRC IT problems are notorious and I'd be quite surprised if they don't exist as well.
Which makes this whole process distinctly fraught, more difficultly. It makes it more expensive. I know that HMRC were estimating the costs, I think at a fairly ludicrous 8 million, as I understand it, of this, which presumably reflects the fact they didn't understand their their client base. If you can call taxpayers clients, HMRC. What is going to happen to the costs of this? I mean, they're going to they're going to escalate enormously, aren't they? I mean, presumably there are estimates to this stage, but are they going to be a factor .
Which makes this whole process distinctly fraught, more difficultly. It makes it more expensive. I know that HMRC were estimating the costs, I think at a fairly ludicrous 8 million, as I understand it, of this, which presumably reflects the fact they didn't understand their their client base. If you can call taxpayers clients, HMRC. What is going to happen to the costs of this? I mean, they're going to they're going to escalate enormously, aren't they? I mean, presumably there are estimates to this stage, but are they going to be a factor .
11:29
11:29
Lord Leigh of Hurley
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Lord Leigh of Hurley
Because it can only be at this at this point is it could be a factor of easily a factor of five compared to the 8 million that was that was included in the short to medium term. And that is because, as Matt mentioned, effectively, you know, there's a function that's been paid for over there but still needs to exist to your good point, particularly for phase two and then for loans and accommodation. So there's actually a. duplication of work to a degree with within those businesses. And also this, we just don't understand how HMRC thought that this was just part of an upgrade.
Other than that's a good point about the RTI or it's just an addition, a small addition to RTI. And, you know, it's actually commented that there's not an expected cost from a software. This is this is like moving a business function, as we said earlier. Well, it is not like it is moving a business function into software that didn't previously exist. This is not an up , an upgrade or an update. This is an additional business function. And whilst I can't speak on behalf of all software providers, there's considerable cost and has been to date in trying to figure all this out.
And that cost is almost certainly going to be passed on to their customers and.
Other than that's a good point about the RTI or it's just an addition, a small addition to RTI. And, you know, it's actually commented that there's not an expected cost from a software. This is this is like moving a business function, as we said earlier. Well, it is not like it is moving a business function into software that didn't previously exist. This is not an up , an upgrade or an update. This is an additional business function. And whilst I can't speak on behalf of all software providers, there's considerable cost and has been to date in trying to figure all this out.
And that cost is almost certainly going to be passed on to their customers and.
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Lord Leigh of Hurley
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Lord Leigh of Hurley
This is all put your finger up in the air and see which way the wind is blowing. It's all numbers. We may be being generous as well in undersizing that I think there is a risk, but nevertheless we are talking. To be quite clear, it's that significant a difference. The delta is, is, is significant. And then actually longer term, well, if they don't do the. simplification this loan is an accommodation.
Well .
Well .
11:31
11:31
Lord Leigh of Hurley
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Lord Leigh of Hurley
In parallel for indefinite period. The potential is very high we think for that. And and the question, if I may also should it be delayed for a year? Well, certainly we feel phase two should because you need to learn from phase one and make any remedial changes. Plus there's this end of year correction process, which is, strangely enough, at the end of the year, and therefore you can't really go straight into another area of phase two if you've not also done the end of year and learnt the. lessons from that. So you know it, we feel it could benefit from a significant.
revision of those of those timings and the costs, and quite a confident. My .
revision of those of those timings and the costs, and quite a confident. My .
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Lord Leigh of Hurley
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Lord Leigh of Hurley
Varies so much from company to company or business to business. It does. And also there's the there's the. operational cost that haven't really been considered as was, you know, learned colleagues were saying earlier in regards to there's going to be a lot of queries from. employees because suddenly something's going to appear on their payslip, which our software generates. Yeah, that they've never seen before. But they're also got, they're still getting taxed, possibly still getting taxed. So the first thing they're going to do is pick up the phone to the, to the payroll team, whether that's in-house or outhouse.
11:33
11:33
Speaker 2
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Speaker 2
Therefore, well, where's the resource? What's the cost. You've potentially got your additional software costs for the business. You've got your additional admin costs for the business. I think the potential ongoing. savings really is only that p11d process if you were to outsource that. But that's not really getting rid of burden. It's just shifting it and spreading it throughout the year and potentially not even spreading it because we have this end of year process. That essentially means you still need to review everything. And I think if you zoom out, we sort of touched on it earlier, it's the question of, is RTI the right place for this?
Because what we're doing is we're taking a yearly. process and merging it with what essentially is another yearly process, but in real time. And we're trying to adapt this benefits regime to the Paye regime rather than the other way around. And it's almost sometimes like the tail wagging the dog . And some of the data that employers have been asked to provide is clearly, for. HMRC a.
Because what we're doing is we're taking a yearly. process and merging it with what essentially is another yearly process, but in real time. And we're trying to adapt this benefits regime to the Paye regime rather than the other way around. And it's almost sometimes like the tail wagging the dog . And some of the data that employers have been asked to provide is clearly, for. HMRC a.
11:34
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11:34
Speaker 2
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Speaker 2
And the RTI system is a record of pay and is used for Universal Credit. etc. but it almost seems like tail wagging the dog in terms of why are we adapting the pay system to do the benefits, rather than adapting the benefit system to be reported via Paye and on the year end process? I think there's some. significant risks there, especially if we go back to talking about the the issues that there has been within.
reconciliation and. allocation of.
reconciliation and. allocation of.
11:35
11:35
Speaker 2
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Speaker 2
That even if we assume that all of that is user error on the employer's side, we know that that error happens. And by rolling this out to. 2.75 million employers, we're. dramatically increasing the chances that those errors happen. And I think even that on its own, is going to be a significant cost both to businesses in chasing that up, but also to HMRC themselves, if they have to increase .
11:35
11:35
Lord Newby
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Lord Newby
Within their charge resolution team. Mr.. Final quick thing from me, there are clearly in year one going to be lots of errors because there's no time to do it properly, and I gather that HMRC that they're going to have a penalty soft landing for the first year. But it seems to me. improbable that all the wrinkles are going to be out within a year. So, I mean,
11:36
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Speaker 2
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Speaker 2
But that that soft landing needs to be extended. And I think some of that soft landing needs to be extended to the year end process as well. We've got multiple. different penalties and interest regimes at play here that I think is going to confuse at best and erode trust in HMRC. For sure. If employers don't fully. understand where they stand with the with these sort of things, I think the penalties absolutely should be just reserved essentially for where entirely non engaging with the .
11:36
Speaker 3
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Speaker 3
Which essentially constitutes fraud. I would yeah, completely agree with that. extended soft landing period for penalties. And just to kind of add more on my point earlier, you know, that need to take a step back, have a synoptic view of this area of the tax system. I think the key is to try and reduce volumes going through this route. And I know there could be some opportunities to. simplify Paye settlement agreements, possibly next year following the call for evidence. If that regime was made more flexible, that could be a more easier route for populations of employers to go down also as well.
You know, there are a number of legacy thresholds and rates that just haven't been updated in years for certain employment expenses and benefits. I mean, we're grateful recently for the increase in the mileage rates. And I know UK and overseas subsistence rates are on the cards from.
You know, there are a number of legacy thresholds and rates that just haven't been updated in years for certain employment expenses and benefits. I mean, we're grateful recently for the increase in the mileage rates. And I know UK and overseas subsistence rates are on the cards from.
11:38
11:38
Speaker 3
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Speaker 3
As announced in the budget yesterday. But I think a number of these legacy allowances do need to be. updated to get that tax free treatment, as they should, because that was the. intention of those flat rate allowances being brought out. And again, to reduce volumes going through. payrolling of these.
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Speaker 3
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Speaker 3
Cost model, they rely on the. ONS annual survey of hours and earnings and that split into different professions as well. Because if you're taking a payroll average or mean hourly rate, I think that's about £19. But if you're looking at finance or tax. professionals or business project managers as well, that can range from 30 to £35. So yeah, if you work it back. £29 per.
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11:39
Speaker 3
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Speaker 3
You know, applying that tax. professional hourly rate to me, you know, that would imply that, you know, I've fully. understood all of that. guidance in less than an hour. And I've, you know, educated all of my colleagues about it as well. And I've got all my systems in place. So I can't see how that's realistic. And that particular business I referred to there valued that employee internal time as around £150,000.
So .
So .
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11:40
Lord Leigh of Hurley
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Lord Leigh of Hurley
That you haven't said? No? I think, if I may just it's a recognition that HMRC s hands are tied on the. You. We've heard legacy used several times today. Its pay is a legacy system, you know, and RTI is a very legacy system. We we recommended quite some time ago to go for a more modern data. exchange system. So it feels that they're constantly having to squeeze a quart into a pint pot with this. And you've heard about RTI and such like. So I think that, you know, there has to be the ability to. invest in more fit for purpose.
systems for all of this,
systems for all of this,
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